Ketchup or Sequestration?

One stream of the analysis of the January retail numbers focused concretely on the impact that the reinstatement of the payroll tax had on the paychecks of more than 160 million U.S. workers and therefore on their spending habits. At the stroke of midnight on Dec. 31 the temporary rolling grand bargain on the fiscal cliff immediately brought lower paychecks to many households. For workers earning $50,000 in annual salary, that means $80 a month slashed from take-home pay, a bag of groceries weekly.

As the end of February approaches we are drowning in the analysis of the impact of "sequestration" on everything from the military to the courts, to state budgets and to the slow down at airports due to mandated cutbacks in the Homeland Security budget.

In between the analysis and absorption of the impact of both these government actions, Warren Buffett, the sage of Omaha, announced his intentions to buy the H.J. Heinz, the beloved ketchup brand of most Americans, for $23 billion. Unfortunately this proposed action has received much less attention in the media and from those concerned about building healthy communities with secure jobs and livelihoods for families and their defendants. It as if the impact of these activities would be experienced in two completely different worlds.

On the one hand this intended acquisition may be appreciated as a balm for our taste buds and a beacon of strength and stability when juxtaposed to a government that seems crippled by ineptitude and fraught with partisan squabbling. On the other hand it is yet another example of how even admired business leaders and investors, like Mr. Buffett, readily succumb to the prevailing philosophy of the market place that measures everything in terms of profit and genius and pays little heed to the collateral damage that is usually measured in lost jobs for some of the lowest paid workers in the supply chain.

The headline in a recent Wall Street Journal editorial was entitled "Warren Romney," thereby suggesting that the leveraged "buyout specialist" from Bain Capital might have really won the presidential election. Buffett's partner in the proposed acquisition is the Brazilian-owned private-equity firm, 3G Capital, which will have responsibility for the operational side of the acquired company. For its 50 percent ownership stake, Berkshire Hathaway is willing to put up $12 billion.

All well and good you might say if it keeps the ketchup flowing and the recipe in American hands. In addition isn't the grandfatherly Mr. Buffett already on record for his willingness to pay more taxes in response to the revenue starved condition that our government finds itself in and to the embarrassment that he finds himself in by the fact that a number of his employees pay more in taxes than he does. But how do those generous gestures and such a publicly recognized commitment to the common good appear in light of the reputation of his Brazilian private equity partner.

3G Capital purchased another well-known American Brand, Burger King, back in December 2010 for about $4 billion including debt from Bain Capital, Goldman Sachs and others. They fired the CEO immediately and laid off thousands of BK workers, including, according to the WSJ, some 413 workers on a single day in December 2010. In June of 2012 they took the company public for $5.5 billion pulling down a handsome profit in the process.

Based on the 3G Capital approach in the Burger King takeover, it seems fair to assume that they are planning a similar approach in the Heinz takeover. In this instance however we are talking about a much larger and leaner company than in the BK case, a doubling of the Heinz debt load to more than $12 billion and a provision in the deal that will give Berkshire Hathaway 9 percent interest on their preferred shares, an interest arrangement worth nearly $750 million a year.

The terms of this latest leveraged buyout arrangement deserve much closer scrutiny not only by shareholders and management of the companies involved but by anyone concerned about the impacts that such deals have on employment, communities and society. Does 3G Capital get a pass because it is partnering with Mr. Buffett? In what ways are they different from Bain Capital that was vilified so frequently during the last presidential election?

How can the socially responsible or faith-based investor who holds shares in Berkshire Hathaway or Heinz or an investment in 3G Capital evaluate the impact of the proposed deal? Are we too easily influenced by the reputation and political philosophy of the dealmaker in evaluating such transactions?

Is there any way that the prevalent private equity models can meet the responsible, ethical and values standards that are operative in both the social and environmental responsible arenas. Must layoffs always be an essential ingredient in the efficiency and profit-taking private equity model?

The standards by which public sector actions and decisions are scrutinized and evaluated must be applied also to the activities of the private sector especially when they will adversely effect livelihoods and the well being of local communities.